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1 file:///c:/users/moha/desktop/mac8e/new folder/coursecompass_fi... COURSES > BA121 > CONTROL PANEL > POOL MANAGER > POOL CANVAS Add, modify, and remove questions. Select a question type from the Add drop-down list and click Go to add questions. Use Creation Settings to establish which default options, such as feedback and images, are available for question creation. Add Creation Settings TestBanks Chapter 1 The Science of Macroeconomics Name Description Instructions Macroeconomics does not try to answer the question of: why do some countries experience rapid growth. what is the rate of return on education. why do some countries have high rates of inflation. what causes recessions and depressions. A typical trend during a recession is that: the unemployment rate falls. the popularity of the incumbent president rises. incomes fall. the inflation rate rises. Macroeconomics is the study of the: activities of individual units of the economy. decision making by households and firms. economy as a whole. interaction of firms and households in the marketplace. The study of the economy as a whole is called: household economics. business economics. microeconomics. macroeconomics. Macroeconomists cannot conduct controlled experiments, such as testing various tax and expenditure policies, because: it is against the law. they tried it once and it did not work. they must make use of the data history gives them. economists already know the answers that would come out of the experiments. 1 of 10 12/8/ :31

2 file:///c:/users/moha/desktop/mac8e/new folder/coursecompass_fi... The ability of macroeconomists to predict the future course of economic events: is no better than the meteorologist's ability to predict the next month's weather. is much better than the meteorologist's ability to predict the next month's weather. has gotten worse over time. is less precise than it was in the 1920s. Which of the combinations listed is not a U.S. president and an important economic issue of his administration? President Carter, inflation President Reagan, budget deficits President G.H.W. Bush, budget deficits President Clinton, inflation All of the following are types of macroeconomics data except the: price of an IBM computer. growth rate of real GDP. inflation rate. unemployment rate. All of the following are important macroeconomic variables except: real GDP. the unemployment rate. the marginal rate of substitution. the inflation rate. The total income of everyone in the economy adjusted for the level of prices is called: a recession. an inflation. real GDP. a business fluctuation. A measure of how fast prices are rising is called the: growth rate of real GDP. inflation rate. unemployment rate. market-clearing rate. The inflation rate is a measure of how fast: 2 of 10 12/8/ :31

3 file:///c:/users/moha/desktop/mac8e/new folder/coursecompass_fi... the total income of the economy is growing. unemployment in the economy is increasing. prices in the economy are rising. the number of jobs in the economy is expanding. Real GDP over time and the growth rate of real GDP. grows; fluctuates is steady; is steady grows; is steady is steady; fluctuates Two striking features of a graph of U.S. real GDP per capita over the twentieth century are the: overall upward trend interrupted by a large downturn in the 1930s. nearly constant level with a large downturn in the 1930s. downward trend in the first half of the century followed by the upward trend in the second half. constant level in the first half of the century followed by the upward trend in the second half. In the U.S. economy today, real GDP per person, compared with its level in 1900, is about: 50 percent higher. twice as high. three times as high. eight times as high. Recessions are periods when real GDP: increases slowly. increases rapidly. decreases mildly. decreases severely. Compared with a recession, real GDP during a depression: increases more rapidly. increases at approximately the same rate. decreases at approximately the same rate. decreases more severely. A severe recession is called a(n): depression. deflation. exogenous event. market-clearing assumption. 3 of 10 12/8/ :31

4 file:///c:/users/moha/desktop/mac8e/new folder/coursecompass_fi... The inflation rate in the United States averaged about: zero between 1900 and zero between 1950 and percent between 1900 and percent between 1950 and Deflation occurs when: real GDP decreases. the unemployment rate decreases. prices fall. prices increase, but at a slower rate. A period of falling prices is called: deflation. inflation. a depression. a recession. A graph of the rate of inflation in the United States over the twentieth century shows: an overall upward trend interrupted by a large downturn in the 1930s. some periods of deflation in the first half of the century, but only positive rates of inflation in the second half of the century. a relatively steady, positive level throughout the century except for deflation in the 1930s. a constant rate of inflation in the first half of the century followed by an upward trend in the second half. A graph of the U.S. unemployment rate over the twentieth century shows: an overall upward trend in the unemployment rate interrupted by a large upturn in the 1930s. an overall downward trend in the unemployment rate interrupted by a large upturn in the 1930s. rates of unemployment always greater than zero with substantial variations from year to year. alternating periods of positive and negative rates of unemployment. During the period between 1900 and 2000, the unemployment rate in the United States was highest in the: 1920s. 1930s. 1970s. 1980s. 4 of 10 12/8/ :31

5 file:///c:/users/moha/desktop/mac8e/new folder/coursecompass_fi... The unemployment rate: was zero during the 1990s in the United States. was zero on average between 1900 and 1950 in the United States. has never been zero in the United States. is usually zero when the economy is not in a recession or depression. Exogenous variables are: fixed at the moment they enter the model. determined within the model. the outputs of the model. explained by the model. Endogenous variables are: fixed at the moment they enter the model. determined within the model. the inputs of the model. from outside the model. In an economic model: exogenous variables and endogenous variables are both fixed when they enter the model. endogenous variables and exogenous variables are both determined within the model. endogenous variables affect exogenous variables. exogenous variables affect endogenous variables. Variables that a model tries to explain are called: endogenous. exogenous. market clearing. fixed. Variables that a model takes as given are called: endogenous. exogenous. market clearing. macroeconomic. Macroeconomic models are used to explain how variables influence variables. 5 of 10 12/8/ :31

6 file:///c:/users/moha/desktop/mac8e/new folder/coursecompass_fi... endogenous; exogenous exogenous; endogenous microeconomic; macroeconomic macroeconomic; microeconomic Important characteristics of macroeconomic models include all of the following except: simplifying assumptions. functional relationships based on controlled experiments. endogenous and exogenous variables. implicit or explicit consistency with microeconomic foundations. In a simple graphical model of the supply and demand for pizza with the price of pizza measured vertically and the quantity of pizza measured horizontally: the supply curve slopes upward and to the right. the demand curve slopes upward and to the right. the supply curve slopes downward and to the right. at the equilibrium price, the supply of pizza exceeds the demand for pizza. In a simple model of the supply and demand for pizza, the endogenous variables are: the price of pizza and the price of cheese. aggregate income and the quantity of pizza sold. aggregate income and the price of cheese. the price of pizza and the quantity of pizza sold. In a simple model of the supply and demand for pizza, when aggregate income increases, the price of pizza and the quantity purchased. increases; decreases increases; increases decreases; increases decreases; decreases In a simple model of the supply and demand for pizza, when the price of cheese increases, the price of pizza and the quantity purchased. increases; increases decreases; increases decreases; decreases increases; decreases Which statement below best illustrates the art, rather than the science of macroeconomics? 6 of 10 12/8/ :31

7 file:///c:/users/moha/desktop/mac8e/new folder/coursecompass_fi... Macroeconomic data provides the motivation for new macroeconomic theory. Macroeconomic relationships can be expressed using symbols and equations. Macroeconomists must determine which simplifying assumptions give misleading results. Graphs and charts can be used to illustrate the history of macroeconomic variables. In the relationship expressed in functional form, Y = G(K, L), Y stands for real GDP, K stands for the amount of capital in the economy, and L stands for the amount of labor in the economy. In this case G( ): is the growth rate of real GDP when the amount of capital and labor in the economy is fixed. indicates that the variables inside the parentheses are endogenous variables in the model. is the symbol that stands for government input into the production process. is the function telling how the variables in the parentheses determine real GDP. Which of the following statements about economic models is true? There is only one correct economic model. All economic models are based on the same assumptions. The purpose of economic models is to show how endogenous variables affect exogenous variables. Economists use different models to address different questions. Macroeconomic models: assume all wages and prices are sticky. assume all wages and prices are flexible. make different assumptions to explain different aspects of the macroeconomy. focus primarily on the optimizing behavior of households and firms. The assumption of continuous market clearing means that: sellers can sell all that they want at the going price. buyers can buy all that they want at the going price. in any given month, buyers can buy all that they want and sellers can sell all that they want at the going price. at any given instant, buyers can buy all that they want and sellers can sell all that they want at the going price. All of the following statements about sticky prices are true except: in the short run, some wages and prices are sticky. the sticky-price model describes the equilibrium toward which the economy slowly gravitates. for studying year-to-year fluctuations, most macroeconomists believe that price stickiness is a better assumption than is price flexibility. magazine publishers tend to change their newsstand prices only every three or four years. The assumption of flexible prices is a more plausible assumption when applied to price changes that occur: 7 of 10 12/8/ :31

8 file:///c:/users/moha/desktop/mac8e/new folder/coursecompass_fi... from minute to minute. from year to year. in the long run. in the short run. An assumption of is more plausible for studying the short-run behavior of the economy, while an assumption of is more plausible for studying the long-run, equilibrium behavior of the economy. deflation; inflation inflation; deflation flexible prices; sticky prices sticky prices; flexible prices When studying the short-run behavior of the economy, an assumption of is more plausible, in contrast to studying the long-run equilibrium behavior of an economy, when an assumption of is more plausible. inflation; unemployment unemployment; inflation flexible prices; sticky prices sticky prices; flexible prices Which of the following is the best example of a sticky price? the price of a barrel of oil the price of the U.S. dollar in terms of euros the price of a share of stock the price of a soda in a vending machine Which of the following is the best example of a flexible price? the price of a cup of coffee in a coffee shop the price of gasoline at a service station the price of a ticket at a movie theater the price of a book in a bookstore How does the distinction between flexible and sticky prices impact the study of macroeconomics? The study of flexible prices is confined to microeconomics, while macroeconomics focuses on sticky prices. Macroeconomists use flexible prices to explain inflation and sticky prices to explain unemployment. Flexible prices are typically assumed in the study of the long run, while sticky prices are assumed in the study of the short run. Endogenous variables are measured using flexible prices, while exogenous variables are measured using sticky prices. 8 of 10 12/8/ :31

9 file:///c:/users/moha/desktop/mac8e/new folder/coursecompass_fi... Macroeconomics is: based on microeconomic foundations. completely separate from microeconomics. explicitly based on microeconomic behavior. a subsidiary branch of microeconomics. Macroeconomics is based on microeconomics for all of the following reasons except: when we study the economy as a whole, we must consider the decisions of individual economic actors. aggregate variables are simply the sum of variables describing many individual decisions. macroeconomic decision makers, when they make their choices, are required to maximize utility functions. to understand the determinants of aggregate investment, we must think about a firm's deciding whether to build a new factory. Macroeconomists are like scientists because they both: design data and conduct controlled experiments to test their theories. rely on data analyzed from experiments they set up in a laboratory. are unlimited in their use of controlled experiments. collect data, develop hypotheses, and analyze the results. Using a market-clearing model to analyze the demand for haircuts is because the price of a haircut usually changes. realistic; frequently realistic; infrequently unrealistic; frequently unrealistic; infrequently d d Assume that the equation for demand for bread at a small bakery is Q = 60 10P + 3Y, where Q is the quantity of b bread demanded in loaves and Y is the average income in the town in thousands of dollars. a. d If the average income in the town is 10, state the equation for Q in terms of P. b d Draw a graph of the demand curve with Q on the horizontal axis and P on the vertical axis. Label the b curve DD. a. Qd = 90 10Pb 9 of 10 12/8/ :31

10 file:///c:/users/moha/desktop/mac8e/new folder/coursecompass_fi... d d Assume that the equation for demand for bread at a small bakery is Q = 60 10P + 3Y, where Q is the quantity of b bread demanded in loaves, P is the price of bread in dollars per loaf, and Y is the average income in the town in b s s thousands of dollars. Assume also that the equation for supply of bread is Q = P 30 P, where Q is the b f d s quantity supplied and P is the price of flour in dollars per pound. Assume finally that markets clear, so that Q = Q. f a. If Y is 10 and P is $1, solve mathematically for equilibrium Q and P. If the average income in the town increases to 15, solve for the new equilibrium Q and P. f b b a. Q = 60 loaves, Pb = $3.00 Q = 70 loaves, Pb = $3.50 The production function for an economy can be expressed as Y = F(K,L), where Y is real GDP, K is the quantity of capital in the economy, and L is the quantity of labor in the economy. a. If F( ) = K + 9L, what is real GDP if the quantity of capital is 200 and the quantity of labor is 500? What is/are the endogenous variable(s) in this model? c. What is/are the exogenous variable(s) in this model? a. c. Y = (200) + 9(500) = 5,200 Y K,L D The quantity of coffee demanded, Q, depends on the price of coffee, P, and the price of tea, P. The quantity of c T S coffee supplied, Q, depends on the price of coffee, P, and the price of electricity, P, according to the following c E equation: QD = 17 2 Pc + 10 PT QS = P c 5 P E a. If the price of tea is $1.00 and the price of electricity is $0.50, what is the equilibrium price and quantity of coffee? What is/are the endogenous variable(s) in this model? c. What is/are the exogenous variable(s) in this model? a. The equilibrium price is $5.50 and the equilibrium quantity is 16. Pc and Q c. PT and PE 10 of 10 12/8/ :31

11 file:///c:/users/moha/desktop/mac8e/new folder (2)/CourseCompas... COURSES > BA121 > CONTROL PANEL > POOL MANAGER > POOL CANVAS Add, modify, and remove questions. Select a question type from the Add drop-down list and click Go to add questions. Use Creation Settings to establish which default options, such as feedback and images, are available for question creation. Add Creation Settings TestBanks Chapter 2 The Data of Microeconomics Name Description Instructions The economic statistic used to measure the level of prices is: GDP. CPI. GNP. real GDP. The statistic used by economists to measure the value of economic output is: the CPI. GDP. the GDP deflator. the unemployment rate. GDP is all of the following except the total: expenditure of everyone in the economy. income of everyone in the economy. expenditure on the economy's output of goods and services. output of the economy. The total income of everyone in the economy is exactly equal to the total: expenditure on the economy's output of goods and services. consumption expenditures of everyone in the economy. expenditures of all businesses in the economy. government expenditures. An economy's equals its. consumption; income consumption; expenditure on goods and services expenditure on goods; expenditures on services income; expenditure on goods and services 1 of 24 12/8/ :32

12 file:///c:/users/moha/desktop/mac8e/new folder (2)/CourseCompas... All of the following are measures of GDP except the total: expenditures of all businesses in the economy. income from all production in the economy. expenditures on all final goods and services produced. value of all final production. It is a national income accounting rule that all expenditure on purchases of products is necessarily equal to: profits of firms. wages of employees. income of the producers of the products. income of employees. Two equivalent ways to view GDP are as the: total payments made to all workers in the economy or the total profits of all firms and businesses in the economy. total expenditures on all goods produced in the economy or the total income earned from producing all services in the economy. total profits of all firms and businesses in the economy or the total consumption of goods and services by all households in the economy. total income of everyone in the economy or the total expenditure on the economy's output of goods and services. In the circular flow model, the flow of dollars from firms to households is paid and the flow of dollars from households to firms is paid. as wages and profits; for goods and services for value added; as imputed values in current dollars; in constant dollars as interest and dividends; for depreciation and taxes Which of the following is a flow variable? wealth the number unemployed government debt income Which of the following is a stock variable? wealth consumption investment income 2 of 24 12/8/ :32

13 file:///c:/users/moha/desktop/mac8e/new folder (2)/CourseCompas... All of the following are a stock except: a consumer's wealth. the government budget deficit. the number of unemployed people. the amount of capital in the economy. All of the following are a flow except: the number of new automobile purchases. the number of people losing their jobs. business expenditures on plant and equipment. the government debt. The amount of capital in an economy is a and the amount of investment is a. flow; stock stock; flow final good; intermediate good intermediate good; final good The market value of all final goods and services produced within an economy in a given period of time is called: industrial production. gross domestic product. the GDP deflator. general durable purchases. GDP is the market value of all goods and services produced within an economy in a given period of time. used intermediate consumer final To compute the value of GDP: goods and services are valued at market prices. the sale of used goods is included. production for inventory is not included. goods and services are valued by weight. Assume that total output consists of 4 apples and 6 oranges and that apples cost $1 each and oranges cost $0.50 each. In this case, the value of GDP is: 3 of 24 12/8/ :32

14 4 of 24 file:///c:/users/moha/desktop/mac8e/new folder (2)/CourseCompas pieces of fruit. $7. $8. $10. All of the following transactions that took place in 2009 would be included in GDP for 2009 except the purchase of a: book printed in 2009, entitled The Year Jeep Cherokee. year 2010 calendar printed in ticket to see the movie Since GDP includes only the additions to income, not transfers of assets, are not included in the computation of GDP. final goods used goods consumption goods goods produced for inventory When a firm sells a product out of inventory, GDP: increases. decreases. is not changed. increases or decreases, depending on the year the product was produced. When a firm sells a product out of inventory, investment expenditures and consumption expenditures. increase; decrease decrease; increase decrease; remain unchanged remain unchanged; increase Assume that a bakery hires more workers and pays them wages and that the workers produce more bread. GDP increases in all of the following cases except when the bread: is sold to households. is stored away for later sale. grows stale and is thrown away. is sold to other firms. When bread is baked but put away for later sale, this is called: waste. saving. fixed investment. 12/8/ :32

15 5 of 24 file:///c:/users/moha/desktop/mac8e/new folder (2)/CourseCompas... investment in inventory. Assume that a rancher sells McDonald's a quarter-pound of meat for $1 and that McDonald's sells you a hamburger made from that meat for $2. In this case, the value included in GDP should be: $0.50. $1. $2. $3. Assume that a tire company sells 4 tires to an automobile company for $400, another company sells a compact disc player for $500, and the automobile company puts all of these items in or on a car that it sells for $20,000. In this case, the amount from these transactions that should be counted in GDP is: $20,000. $20,000 less the automobile company's profit on the car. $20,900. $20,900 less the profits of all three companies on the items that they sold. The value added of an item produced refers to: a firm's profits on the item sold. the value of the labor inputs in the production of an item. the value of a firm's output less the value of its costs. the value of a firm's output less the value of the intermediate goods that the firm purchases. Assume that a firm buys all the parts that it puts into an automobile for $10,000, pays its workers $10,000 to fabricate the automobile, and sells the automobile for $22,000. In this case, the value added by the automobile company is: $10,000. $12,000. $20,000. $22,000. In computing GDP, expenditures on used goods are included. production added to inventories is excluded. the amount of production in the underground economy is imputed. the value of intermediate goods is included in the market price of the final goods. To avoid double counting in the computation of GDP, only the value of goods are included. final used intermediate investment 12/8/ :32

16 file:///c:/users/moha/desktop/mac8e/new folder (2)/CourseCompas... Imputed values included in GDP are the: market prices of goods and services. estimated value of goods and services that are not sold in the marketplace. price of goods and services measured in constant prices. price of goods and services measured in current prices. An example of an imputed value in the GDP is the: value-added of meals cooked at home. housing services enjoyed by homeowners. services of automobiles to their owners. value of illegal drugs sold. In principle, the GDP accounts should but do not have an imputation for: housing services enjoyed by homeowners. rental services of automobiles driven by owners. meals cooked in restaurants. housing services enjoyed by renters. The underground economy: is included in the latest GDP accounts. includes only illegal activities. includes domestic workers for whom Social Security tax is not collected. excludes the illegal drug trade. Real GDP is measured in dollars time. current; at a point in current; per unit of constant; at a point in constant; per unit of Nominal GDP is measured in dollars time. current; at a point in current; per unit of constant; at a point in constant; per unit of 6 of 24 12/8/ :32

17 file:///c:/users/moha/desktop/mac8e/new folder (2)/CourseCompas... Nominal GDP means the value of goods and services is measured in prices. current real constant average Real GDP means the value of goods and services is measured in prices. current actual constant average Assume that apples cost $0.50 in 2002 and $1 in 2009, whereas oranges cost $1 in 2002 and $1.50 in If 4 apples were produced in 2002 and 5 in 2009, whereas 3 oranges were produced in 2002 and 4 in 2009, then real GDP (in 2002 prices) in 2009 was: $5. $6.50. $9.50. $11. The best measure of the economic satisfaction of the members of a society is: nominal GDP. real GDP. the rate of inflation. the value of corporate profits. If nominal GDP in 2009 equals $14 trillion and real GDP in 2009 equals $11 trillion, what is the value of the GDP deflator? If the GDP deflator in 2009 equals 1.25 and nominal GDP in 2009 equals $15 trillion, what is the value of real GDP in 2009? $12 trillion $12.5 trillion $15 trillion $18.75 trillion 7 of 24 12/8/ :32

18 file:///c:/users/moha/desktop/mac8e/new folder (2)/CourseCompas... The GDP deflator is equal to: the ratio of nominal GDP to real GDP. the ratio of real GDP to nominal GDP. real GDP minus national GDP. nominal GDP minus real GDP. Assume that apples cost $0.50 in 2002 and $1 in 2009, whereas oranges cost $1 in 2002 and $1.50 in If 4 apples were produced in 2002 and 5 in 2009, whereas 3 oranges were produced in 2002 and 5 in 2009, then the GDP deflator in 2009, using a base year of 2002, was approximately: If nominal GDP grew by 5 percent and real GDP grew by 3 percent, then the GDP deflator grew by approximately percent If nominal GDP increased by 5 percent and the GDP deflator increased by 3 percent, then real GDP by percent. increased; 2 decreased; 2 increased; 8 decreased; 8 Nominal GDP measures the value of goods and services in prices, while real GDP measures the value of goods and services in prices. foreign; domestic domestic; foreign current; constant constant; current Real GDP is a better measure of economic well-being than nominal GDP, because real GDP: excludes the value of goods and services exported aboard. includes the value of government transfer payments. measures changes in the quantity of goods and services produced by holding prices constant. adjusts the value of goods and services produced for changes in the foreign exchange rate. 8 of 24 12/8/ :32

19 file:///c:/users/moha/desktop/mac8e/new folder (2)/CourseCompas... Chain-weighted measures of real GDP make use of prices from: an unchanging base year. a continuously changing base year. a base year that is changed approximately every 5 years. a base year that is changed approximately every 10 years. The new chain-weighted measures of real GDP are an improvement over traditional measures because the prices used to compute real GDP are: never far out of date. always from the same base year. imputed. chained to the CPI. The national income accounts identity, for an open economy, is: Y = C + I + G NX. Y = C + I + G + NX. Y = C + I + G. Y = C + I G. If GDP (measured in billions of current dollars) is $5,465, consumption is $3,657, investment is $741, and government purchases are $1,098, then net exports are: $131. $131. $31. $31. If GDP (measured in billions of current dollars) is $5,465, consumption is $3,657, investment is $741, and net exports are $1,910, then government purchases are: $2,977. $1,910. $843. $1,067. If real GDP grew by 6 percent and population grew by 2 percent, then real GDP per person grew by approximately percent of 24 12/8/ :32

20 file:///c:/users/moha/desktop/mac8e/new folder (2)/CourseCompas... In the national income accounts, consumption expenditures include all of the following except household purchases of: durable goods. nondurable goods. new residential housing. services. In the national income accounts, the purchase of durables, nondurables, and services by households are classified as: consumption. investment. government purchases. net exports. If total consumption (measured in billions of current dollars) equals $3,657, consumption of durable goods is $480, and consumption of nondurable goods is $1,194, then consumption of services is: $1,674. $2,463. $2,083. $1,983. In the national income accounts, goods bought for future use are classified as which type of expenditure? services investment government purchases net exports If total investment (measured in billions of current dollars) equals $741, business fixed investment is $524, and residential fixed investment is $222, then inventory investment is: $5. $5. $15. $15. In the national income accounts, all of the following are classified as government purchases except: payments made to Social Security recipients. services provided by police officers. purchases of military hardware. services provided by U.S. senators. In the national income accounts, government purchases are goods and services purchased by: 10 of 24 12/8/ :32

21 11 of 24 file:///c:/users/moha/desktop/mac8e/new folder (2)/CourseCompas... the federal government. the federal and state governments. state and local governments. federal, state, and local governments. In the national income accounts, net exports equal: exported goods minus imported goods. exported goods and services minus imported goods and services. exported goods minus imported services. exported goods and services plus imported goods and services. If GDP (measured in billions of current dollars) is $5,465 and the sum of consumption, investment, and government purchases is $5,496, while exports equal $673, imports are: $673. $673. $704. $704. All of the following actions are investments in the sense of the term used by macroeconomists except: IBM's building a new factory. corner candy store's buying a new computer. John Smith's buying a newly constructed home. Sandra Santiago's buying 100 shares of IBM stock. The investment component of GDP includes all of the following except: purchases of corporate stock. spending on new plants and equipment. purchases of new housing by households. changes in business inventories. In 2010, the GDP of the United States totaled about: $14.5 billion. $145 billion. $14.5 trillion. $145 trillion. In 2010, GDP per person in the United States was approximately: $7,000. $27,000. $47, /8/ :32

22 file:///c:/users/moha/desktop/mac8e/new folder (2)/CourseCompas... $74,000. In 2010 in the United States, the approximate percentage of GDP that was spent on consumption was: 67 percent. 50 percent. 31 percent. 16 percent. In 2010 in the United States, total government purchases per person (in current dollars) amounted to approximately: $1,900. $9,700. $13,500. $25,600. In 2010, American net borrowings from abroad, per person, in current dollars, amounted to approximately: $100. $220. $1,675. $10,000. GNP equals GDP income earned domestically by foreigners income that nationals earn abroad. plus; plus minus; minus minus; plus plus; minus Net national product equals GDP: plus net investment. minus net investment. plus depreciation. minus depreciation. As a percentage of GNP, depreciation (also called the consumption of fixed capital) amounts to approximately: 10 percent. 25 percent. 50 percent. 0 percent. 12 of 24 12/8/ :32

23 file:///c:/users/moha/desktop/mac8e/new folder (2)/CourseCompas... National income differs from net national product by an amount called: depreciation. indirect business taxes. a statistical discrepancy. net foreign factor income payments. The largest component of national income is: corporate profits. compensation of employees. proprietors' income. net interest. Disposable personal income: is computed by subtracting personal tax and nontax payments from personal income. is generally greater than personal income. includes corporate profits but not dividends. does not include government transfers to individuals. According to the usual seasonal pattern of the U.S. economy, GDP is highest in the quarter of the year that includes: January, February, and March. April, May, and June. July, August, and September. October, November, and December. The CPI is determined by computing: an average of prices of all goods and services. the price of a basket of goods and services that changes every year, relative to the same basket in a base year. the price of a fixed basket of goods and services, relative to the price of the same basket in a base year. nominal GDP relative to real GDP. Prices of items included in the CPI are: averaged with the price of every item weighted equally. weighted according to amount of the item produced in GDP. weighted according to quantity of the item purchased by the typical household. chained to the base year by the year-to-year growth rate of the item. Assume that apples cost $0.50 in 2002 and $1 in 2009, whereas oranges cost $1 in 2002 and $0.50 in If 10 apples and 5 oranges were purchased in 2002, and 5 apples and 10 oranges were purchased in 2009, the CPI for 2009, using 2002 as the base year, is: 13 of 24 12/8/ :32

24 file:///c:/users/moha/desktop/mac8e/new folder (2)/CourseCompas The core inflation rate: measures the change in producer prices. is measured using a Paasche index. excludes food and energy prices. includes the price of exports and includes the price of imports. Measuring the rate of inflation using a market basket that excludes food and energy prices is preferred by some analysts because this measure, called core inflation, provides a real, rather than a nominal, rate of inflation. gives a better measure of ongoing, sustained price changes. is more consistent with measures of inflation used in other countries. fluctuates more than measures of inflation that include food and energy prices. An increase in the price of goods bought by firms and the government will show up in: the CPI but not in the GDP deflator. the GDP deflator but not in the CPI. both the CPI and the GDP deflator. neither the CPI nor the GDP deflator. An increase in the price of imported goods will show up in: the CPI but not in the GDP deflator. the GDP deflator but not in the CPI. both the CPI and the GDP deflator. neither the CPI nor the GDP deflator. Unlike the GDP deflator, the CPI includes the prices of: goods purchased by firms. goods purchased by governments. exported goods. imported goods. Assume that the market basket of goods and services purchased in 2004 by the average family in the United States costs $14,000 in 2004 prices, whereas the same basket costs $21,000 in 2009 prices. However, the basket of goods and services actually purchased by the average family in 2009 costs $20,000 in 2009 prices, whereas this same basket would have cost $15,000 in 2004 prices. Given this data, a Laspeyres price index of 2009 prices using 2004 as the base year would be: 14 of 24 12/8/ :32

25 file:///c:/users/moha/desktop/mac8e/new folder (2)/CourseCompas approximately approximately Assume that the market basket of goods and services purchased in 2004 by the average family in the United States costs $14,000 in 2004 prices, whereas the same basket costs $21,000 in 2009 prices. However, the basket of goods and services actually purchased by the average family in 2009 costs $20,000 in 2009 prices, whereas this same basket would have cost $15,000 in 2004 prices. Given these data, a Paasche index for 2009 using 2004 prices would be: approximately approximately The CPI is a: Laspeyres price index. Paasche price index. Laspeyres quantity index. Paasche quantity index. The GDP deflator is a: Laspeyres price index. Paasche price index. Laspeyres quantity index. Paasche quantity index. When prices of different goods are increasing by different amounts, the price index that will rise the fastest is: Fisher's ideal index. the CPI. the GDP deflator. a Paasche index. The panel of economists appointed by the Senate Finance Committee estimated that the CPI inflation by approximately percentage point(s) per year. overestimates; 1 overestimates; 10 underestimates; 1 underestimates; 10 The number of households interviewed in the monthly employment survey of the U.S. Bureau of Labor Statistics is approximately: 15 of 24 12/8/ :32

26 16 of 24 file:///c:/users/moha/desktop/mac8e/new folder (2)/CourseCompas... 6, , , million. According to the definition used by the U.S. Bureau of Labor Statistics, a person is not in the labor force if that person: is going to school full time. is temporarily absent from a job because of illness. has been temporarily laid off. is out of a job and looking for work during the previous four weeks. According to the definition used by the U.S. Bureau of Labor Statistics, people are considered to be unemployed if they: are out of a job, but not looking for work. retired from the labor force before age 65. do not have a job, but have looked for work in the past 4 weeks. are absent from work because of bad weather or illness. The labor force equals the: adult population. number of employed individuals. number of unemployed individuals. number of employed and unemployed individuals. Assume that the adult population of the United States is million, total employment is million, and 9.4 million are unemployed. Then the unemployment rate, as normally computed, is approximately percent If 7 million workers are unemployed, 143 million workers are employed, and the adult population equals 200 million, then the unemployment rate equals approximately percent The labor-force participation rate is the percentage of the: 12/8/ :32

27 file:///c:/users/moha/desktop/mac8e/new folder (2)/CourseCompas... adult population that is employed. adult population that is in the labor force. labor force that is employed. labor force that is unemployed. If the unemployment rate is 6 percent and the number of employed is 188 million, then the labor force equals million If an increasing proportion of the adult population is retired, then the labor force participation rate: will increase. will decrease. will remain constant. may increase, decrease, or remain constant. If the adult population equals 250 million, of which 145 million are employed and 5 million are unemployed, the labor force participation rate equals percent If the number employed increases while the number unemployed does not change, the unemployment rate: will increase. will decrease. will not change. may either increase or decrease. In the United States since the end of World War II: the labor force participation rates of both men and women have increased. the labor force participation rates of both men and women have decreased. the labor force participation rate of men has increased, while the labor force participation rate of women has decreased. the labor force participation rate of men has decreased, while the labor force participation rate of women has increased. The household survey conducted by the Bureau of Labor Statistics provides estimates of the number of workers, while the establishment survey provides estimates of the number of workers. 17 of 24 12/8/ :32

28 file:///c:/users/moha/desktop/mac8e/new folder (2)/CourseCompas... self-employed; unemployed unemployed; self-employed with jobs; on firms' payrolls on firms' payrolls; with jobs The employment statistics computed from the establishment survey do not include: workers with two jobs. the self-employed. workers on firms' payrolls. part-time workers on firms' payrolls. A worker with two jobs is counted: once in both the household and the establishment surveys. once in the household survey, but twice in the establishment survey. once in the establishment survey, but twice in the household survey. twice in both the household and the establishment surveys. An estimate of the number of unemployed workers in the economy can be obtained from: both the household and establishment surveys. from the household survey, but not from the establishment survey. from the establishment survey, but not from the household survey. from neither the household nor the establishment surveys. An estimate of total employment in the economy can be obtained from: both the household and establishment surveys. from the household survey, but not from the establishment survey. from the establishment survey, but not from the household survey. from neither the household nor the establishment surveys. A farmer grows wheat and sells it to a miller for $1; the miller turns the wheat into flour and sells it to a baker for $3; the baker uses the flour to make bread and sells the bread for $6. The value added by the miller is: $1. $2. $3. $6. A woman marries her butler. Before they were married, she paid him $60,000 per year. He continues to wait on her as before (but as a husband rather than as a wage earner). She earns $1,000,000 per year both before and after her marriage. The marriage: 18 of 24 12/8/ :32

29 file:///c:/users/moha/desktop/mac8e/new folder (2)/CourseCompas... does not change GDP. decreases GDP by $60,000. increases GDP by $60,000. increases GDP by more than $60,000. A woman marries her butler. Before they were married, she paid him $60,000 per year. He continues to wait on her as before (but as a husband rather than as a wage earner). She earns $1,000,000 per year both before and after her marriage. If GDP were changed so that it truly measured the sum of all final economic activity, the marriage would: decrease GDP. increase GDP. leave GDP unchanged. first decrease and then increase GDP. A fixed-weight price index like the CPI the change in the cost of living because it take into account that people can substitute less expensive goods for ones that have become more expensive. underestimates; does not overestimates; does accurately estimates; does overestimates; does not Exhibit: Totals Recorded for the United States Durable goods consumption (billions of dollars)* $ 497 Nondurable goods consumption 1,301 Services consumption 2,342 Business fixed investment 566 Residential fixed investment 224 Inventory investment Federal government purchases State and local government purchases 683 Exports 640 Imports 670 Excess of GNP over GDP 7 Depreciation 658 Indirect business taxes 551 Corporate profits (includes wage accruals less disbursements) 387 Social insurance contributions 556 Net interest 442 Dividends (includes business transfer payments) 162 Government transfers to individuals 837 Personal interest income 694 Personal tax and nontax payments 645 *Note: The numbers given in this exhibit and the answers to the following questions differ from those in Table 2-1 in the body of the text. Reference: Ref 2-1 (Exhibit: Totals Recorded for United States) What were GDP, consumption expenditures, investment expenditures, government purchases, and net exports? 6,039; 4,140; 797; 1,132; and -30 billion dollars. 19 of 24 12/8/ :32

30 file:///c:/users/moha/desktop/mac8e/new folder (2)/CourseCompas... Exhibit: Totals Recorded for the United States Durable goods consumption (billions of dollars)* $ 497 Nondurable goods consumption 1,301 Services consumption 2,342 Business fixed investment 566 Residential fixed investment 224 Inventory investment 7 Federal government purchases 449 State and local government purchases 683 Exports 640 Imports 670 Excess of GNP over GDP 7 Depreciation 658 Indirect business taxes 551 Corporate profits (includes wage accruals less disbursements) 387 Social insurance contributions 556 Net interest 442 Dividends (includes business transfer payments) 162 Government transfers to individuals 837 Personal interest income 694 Personal tax and nontax payments 645 *Note: The numbers given in this exhibit and the answers to the following questions differ from those in Table 2-1 in the body of the text. Reference: Ref 2-1 (Exhibit: Totals Recorded for United States) What were net national product, national income, personal income, and disposable personal income? 5,388; 5,388; 5,145; and 4,500 billion dollars. Exhibit: Totals Recorded for the United States Durable goods consumption (billions of dollars)* $ 497 Nondurable goods consumption 1,301 Services consumption 2,342 Business fixed investment 566 Residential fixed investment 224 Inventory investment Federal government purchases State and local government purchases 683 Exports 640 Imports 670 Excess of GNP over GDP 7 Depreciation 658 Indirect business taxes 551 Corporate profits (includes wage accruals less disbursements) 387 Social insurance contributions 556 Net interest 442 Dividends (includes business transfer payments) 162 Government transfers to individuals 837 Personal interest income 694 Personal tax and nontax payments 645 *Note: The numbers given in this exhibit and the answers to the following questions differ from those in Table 2-1 in the body of the text. Reference: Ref 2-1 (Exhibit: Totals Recorded for United States) What were the approximate ratios of consumption, investment, and government purchases to GDP? 20 of 24 12/8/ :32

31 file:///c:/users/moha/desktop/mac8e/new folder (2)/CourseCompas... about 69 percent; about 13 percent; and about percent 19. Exhibit: Quantity Consumed and Price of Good Base Year Later Year Price of good A Quantity of good A Price of good B Quantity of good B In the exhibit, the citizens of country XYZ come to desire more of good A. As a result, the quantity and price of the good both rise. a. Compute nominal GDP in the base year and later year. Compute real GDP in the base and later years (in base-year prices). c. Compute the GDP deflator in the later year, using your answers to parts a and d. Compute a fixed-weight price index for the later year, using the base-year quantities as weights. e. Which price index rises faster, the GDP deflator (Paasche) index or the fixed-weight index (Laspeyres) index? a. Base-year nominal GDP = 20,000. Later-year nominal GDP = 50,000. Real GDP in base year = 20,000. c. GNP deflator in later year = d. Fixed-weight index = e. The Paasche index, with current quantity weights, rises faster in this case than the base-year quantityweighted Laspeyres index. Real GDP in later year = 30,000. Assume two countries have the same nominal GDP (measured in the same currency using the same accounting rules). Explain at least three reasons why you cannot assume that citizens in each country enjoy approximately the same level of economic well-being. Some possible, but not all, explanations include: a. different price levels in the two countries would result in different amounts of real GDP, i.e., different quantities of goods and services available in each country; different-sized populations could result in different quantities of goods and services available per person in each country; c. different levels of nonmarket production in the two countries would alter the quantity of goods and services available in each country; d. different amounts of leisure time available (not captured in nominal GDP figures) would cause economic well-being to differ in the two countries; e. different distributions of income in the two countries could alter the quantity of goods and services available to the typical citizen in each country; f. different quantities of both positive and negative externalities associated with producing GDP, such as pollution and congestion, which are not measured in GDP, would cause the different levels of economic well-being between the two countries. Economic statistics are not perfect. Explain at least one way in which each of the following statistics as currently calculated in the United States fails to completely or accurately measure the corresponding economic concept (in parentheses): a. real GDP per person (economic well-being); CPI (cost of living); c. unemployment rate (involuntary unemployment). a. 21 of 24 The official measure of GDP does not include measurements of leisure time available, nonmarket production, production in the underground economy, the distribution of income, or production externalities (e.g., pollution). 12/8/ :32

32 file:///c:/users/moha/desktop/mac8e/new folder (2)/CourseCompas... The CPI does not allow substitution away from products with rising prices and has difficulty distinguishing between price changes and quality changes in products included in the index. c. The official unemployment rate does not take into account discouraged workers, part-time workers who desire full-time employment, and workers employed in jobs not matching their skill level, such as taxi drivers with PhDs in physics. There are a number of statistics computed to measure the price level, such as the GDP deflator and the CPI. The choice of which of these measures to use depends in many cases on the specific question in which you are interested. For each of the following situations, state whether the CPI or GDP deflator is a more appropriate measure to use and explain why the statistic is preferred. a. You are interested in looking at the impact of higher prices of imported oil in the overall cost of living. The government is interested in whether increases in defense spending are affecting the price level. c. An economic consulting firm is investigating the impact on the aggregate price level of more computers and electronic technology used in production. a. The CPI is the more appropriate statistic, because the price of imports is not included in the GDP deflator. The GDP deflator is the more appropriate statistic, because the CPI does not include the prices of goods and services purchased by the government sector. c. The GDP deflator is more appropriate, because the CPI does not include prices of goods and services purchased by businesses or the government sector. One senator criticizes the government for making an inadequate effort to stimulate the economy based on data from the BLS establishment survey that shows the number of jobs in the economy has fallen. Another senator counters that the number of employed workers in the economy has increased over the same period, based on the BLS household survey. Explain how both senators can be correct. If the number of self-employed workers and workers employed in new start-up firms (who are included in the household survey, but not in the establishment survey) has increased more rapidly than the decline in payroll jobs counted in the establishment survey, then the number of employed workers as measured in the household survey could increase while the number of payroll jobs decreases. There are a number of measures of aggregate economic activity, such as GDP, GNP, national income, personal income, and disposable personal income. Each of these measures can be a good indicator depending on the issue under consideration. For each of the following issues, give your reasons for selecting one of the measures just mentioned as the best indicator to use in studying the issue: a. the proportion of income households save; the relative share of earnings going to labor versus capital; c. the total output of final goods and services. a. Disposable personal income provides a measure of the income households have to use for either consumption or saving after they pay taxes. National income provides a measure of the income going to the factors of production. c. GDP is the most complete measure of the value of newly produced goods and services in the economy. In contrast, personal income includes transfer payments, which do not represent newly produced goods and services. Real GDP per capita is an imperfect measure of economic well-being because it does not value home production nor production in the underground economy, among other factors. Give at least two examples that show why the omission of these types of items will make a difference in evaluating economic well-being. One example should explain how the omissions distort comparisons of economic well-being across countries and the other example should explain how the omission distorts comparisons of economic well-being in the same country over time. 22 of 24 12/8/ :32